Not able to understand problem 7 of question bank 2 for Quants, guidance much appreciated.

[Andy]

Guys, 

I am not able to understand concept of time weighted rate of return, here is the question with answer but I do not understand how is the math done here...

An investor buys one share of stock for $100. At the end of year one she buys three more shares at $89 per share. At the end of year two she sells all four shares for $98 each. The stock paid dividend of $1 per share at the end of year one and year two. What is the investor's time weighted rate of return?

A. 6.35%

B. 11.24%

C. 0.06%

Any idea on how to solve this problem, what approach to take in general for this kind of time weighted problems?

[Andy]

Here is the solution for the problem given in solution as:

The Correct answer is C. 

The Holding period return in year one is ($89 - $100+ $1) / $100 = -10.00%

The holding period return in year two is ($98 - $89 +$1) / $89 = 11.24%

the time weighted return is [{1+ (-0.1000)}{1+.1124}]^1/2 = .06%

am not sure as to how this calculation is done and any thoughts or suggestions would be highly appreciated. 

[Kaushik Srini]

Hello All,

Complete silence in the group.
Hope everyone's busy preparing hard.

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[Andy]

We need to make this group, more interactive...seriously...guys add more people if need be...

On Friday, August 3, 2012 8:20:43 AM UTC-4, Kaushik S wrote:

Hello All,

Complete silence in the group.
Hope everyone's busy preparing hard.